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The Bank of Russia stated that the external environment for the Russian economy remains “challenging” and “significantly constrains economic activity.”

The headquarters of the Central Bank of Russia in Moscow on February 28, 2022. The large-scale sanctions imposed on Russia by Western capitals after the February 24 invasion of Ukraine, as well as Moscow’s countermeasures, have isolated the country from the rest of the world. financial ecosystem.

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The Central Bank of Russia kept its key interest rate at 7.5% for the second session in a row on Friday, but noted that inflationary risks are growing.

The Bank of Russia lowered interest rates six times this year. The prime rate was held at 7.5% in October after a 50 basis point cut in September, below 8% previously. The Bank of Russia last raised interest rates in late February, following Moscow’s invasion of Ukraine, raising the key rate to 20% from 9.5% at the time.

In its statement on Friday, the Bank said that consumer prices are currently rising at a “moderate pace” while consumer demand is “moderate”.

“Inflationary expectations of households and businesses are essentially unchanged, remaining high, at the same time, inflationary risks are rising and outweighing disinflationary risks,” the Bank notes. “This comes on the back of rising inflationary pressures from the labor market, worsening terms of trade and a softer fiscal stance.”

According to the data of the Bank of Russia, the annual inflation of Russia in December was estimated at 12.7%, which significantly exceeds the 4% target index. The bank’s own forecasts now see annual inflation falling to between 5% and 7% in 2023, before returning to target in 2024.

“Moving forward, when making decisions on its main interest rates, the Bank of Russia will take into account actual and expected inflation dynamics related to the target and economic transformation processes, as well as risks arising from internal and external conditions and the reaction of financial markets. “.

Since the invasion of Ukraine, Russia’s economy has been buffeted by a barrage of punitive economic sanctions from Western powers that have damaged its growth prospects and driven all but Moscow out of the global financial system.

The International Monetary Fund (IMF) predicts that Russia’s GDP will decrease by 3.4 percent in 2022, and annual inflation will reach 13.8 percent next year.

However, there is debate among Western economists about how far the sanctions have gone. The IMF noted short-term signs of resilience in the Russian economy, while others argued Russia was facing “economic oblivion,” citing the lingering costs of foreign firms leaving and reduced access to key technology and investment imports.

Economic outlook remains ‘challenging’

The bank clarified. “It particularly refers to logistical problems that still exist in many areas. However, the high-frequency readings point to some pick-up in business activity in the fourth quarter.”

Russia has pledged to undergo structural economic reforms to mitigate the long-term impact of Western sanctions. The bank says the initiative is causing a change in the “structure of aggregate demand”, with consumer demand remaining subdued.

The bank said the government’s fiscal easing will begin to support economic activity in 2023.

“The Bank of Russia takes into account the decisions already made regarding the medium-term spending path of the federal budget and the fiscal system in general,” the message says.

“If the budget deficit widens further, tighter monetary policy may be required to bring inflation back to the target level in 2024 and keep it close to 4% thereafter.”

The bank added that future policy decisions will take into account “actual and expected inflation dynamics in relation to the target and economic transformation processes”, as well as “risks arising from internal and external conditions and the reaction of financial markets”.

His next political meeting will take place on February 10.



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